Inflation: Concepts Flashcards
Inflation in Year 1 is 2% and inflation in Year 2 is 1%. Does this mean:
a) Prices rose in Year 1 and Year 2
b) Prices rose in Year 1 and fell in Year 2
c) Prices fell in Year 1 and rose in Year 2
d) Prices fell in Year 1 and Year 2
a) Prices rose in Year 1 and Year 2
Inflation in Year 1 is 1% and inflation in Year 2 is -1%. Does this mean:
a) Prices rose in Year 1 and Year 2
b) Prices rose in Year 1 and fell in Year 2
c) Prices fell in Year 1 and rose in Year 2
d) Prices fell in Year 1 and Year 2
b) Prices rose in Year 1 and fell in Year 2
What does it mean if headline inflation is higher than underlying inflation?
The prices of volatile items rose more than most other goods and services
What does it mean if headline inflation is lower than underlying inflation?
The prices of volatile items rose less than most other goods and services
A type of good makes up 5% of CPI, and increases by 30%. What is its contribution to inflation?
It has increased the CPI by 1.5%
A type of good makes up 20% of CPI, and increases by 7%. What is its contribution to inflation?
It has increased inflation by 1.4%
How does inflation affect inequality?
On the one hand, low-skilled workers have less bargaining power to negotiate pay raises to keep up with inflation - widening income inequality.
On the other hand, inflation erodes the value of debt and of cash savings - reducing wealth inequality.
Why does inflation reduce international competitiveness?
We now are asking for higher prices when trying to sell our exports, so foreigners are less likely to buy from us
Why is deflation even worse than inflation?
If people expect prices to fall in the future, they will defer consumption. This causes AD and GDP to decrease.
What do we mean when we say ‘a bit of inflation is good because it allows for downward wage adjustments’?
Workers are unlikely to accept a wage cut, even in a recession (when they should in order to maintain employment). But if there is inflation of, say, 3%, firms could offer a 2% wage rise - this is actually a real wage cut, which would allow firms to cut costs and continue to employ their staff
What do we mean when we say that ‘a bit of inflation is good because it causes bracket creep’?
With inflation, individuals’ incomes rise in nominal terms - even if they aren’t actually any richer.
But because they now earn a higher amount, they move up into higher tax brackets and are charged a higher tax rate, improving the government’s budget.
How successfully has the RBA achieved its inflation target?
Broadly, inflation has averaged between 2-3%, which is their target. However, inflation was consistently below the target range for 6 years prior to the pandemic - causing the OECD to call for an inquiry into the RBA’s decision-making process.
During the pandemic, the RBA helped to stabilise AD and inflation - but their expansionary stance then contributed (along with other reasons) to a surge in inflation to 7.8% in 2023
The contractionary policy since 2023 has helped inflation to fall just as rapidly as it had risen
What was Australia’s inflation rate in 2020?
-0.3%
What was Australia’s inflation in 2022?
7.8%
List some microeconomic policies used by the Australian Government that have helped reduce inflationary pressures.
Trade liberalisation (removing protection, free trade agreements)
Financial deregulation (1980s floated the AUD and allowed foreign portfolio investment)
Labour market decentralisation (allowing enterprise agreements and individual contracts since 1990s)
Competition policy (the ACCC prevents monopolies and anti-competitive behaviour such as collusion)
